Shorenstein Under Duress With Troubled Debt Approaching $1B

Shorenstein Properties has been a fixture in the skylines of cities across the country for decades. But now, some of the office towers that created the Shorenstein family's legacy are beset by problems.

Last week, Shorenstein was forced to surrender ownership of Capella Tower to lender Metropolitan Life Insurance after failing to find a suitable buyer for the second-tallest tower in downtown Minneapolis.

That building is just the tip of the iceberg. The San Francisco-based firm has another $822M in defaulted or at-risk debt tied to large office properties from coast to coast, according to a Bisnow analysis of the Morningstar Credit securitized loan database.

Shorenstein, run by third-generation CEO Brandon Shorenstein, has acquired $19B in assets since 1992, according to the company's website. The family has long been considered real estate royalty. In the mid-1980s, it controlled 25% of San Francisco's Class-A office space, according to SF Gate.

The real estate dynasty has been featured on Forbes' list of America's richest families, with a net worth of $1.3B in 2015, shortly before longtime CEO Doug Shorenstein died of cancer at age 60. 

Its growing pile of debt puts Shorenstein alongside other office landlords scrambling under special servicers’ guns as their portfolios of aging offices bleed — most notably, Charles Cohen, who has accumulated $1B in defaults, and Aby Rosen, who is facing a $2.5B debt bill.

A Shorenstein representative declined to comment.

In 2018, the company paid $255M for the 58-story Capella Tower, which was more recently assessed to be worth just less than $197M, according to the Star Tribune.

That building was handed over to Shorenstein’s lender, MetLife, but the developer is mired in negotiations all over its portfolio as it grapples with maturing loans.

A few blocks over from Capella Tower, Shorenstein’s three-building Washington Square office has struggled. At 20 Washington Square, sole tenant Voya Financial vacated after its lease expired last year, moving into a new location in the Minneapolis central business district.

The loss resulted in the portfolio-wide occupancy rate falling from 84% in January 2023 to 70%, according to April 2023 commentary in the Morningstar Credit database. 

The $61.1M loan backed by the roughly 1M SF property matured in December and was sent to special servicing. It is no longer in special servicing after an extension pushed the maturity date to December 2024, Morningstar told Bisnow.

Shorenstein bought the campus in 2014 and has invested nearly $35M in improvements. In 2019, the firm attempted to sell the package, consisting of 20 Washington Square, 100 Washington Square and 111 Washington Square, according to the Minneapolis/St. Paul Business Journal.

Other large tenants at the campus have leases expiring in the coming years. ECMC Group, which occupies 13% of the portfolio’s net rentable area, and Code 42 Software, occupying 7% of the portfolio, have lease expirations in 2028. 

Now, Shorenstein is attempting to both lease up the buildings' office space and sell 20 Washington Square, according to Morningstar.

In Philadelphia, the loans backed by two more of Shorenstein’s properties have landed in special servicing.

1818 Market St. serves as collateral for a $223M loan now in special servicing. The loan was transferred at Shorenstein’s request following an imminent default. The loan matured March 9, and settlement discussions are ongoing, according to commentary on Morningstar’s platform.

The nearly 1M SF, 37-story office building sits in Philadelphia’s central business district. Shorenstein purchased the property in 2015 for $184.8M and spent $29.5M on upgrades between 2015 and 2021. However, reported occupancy declined to 74% as of October 2023 from 85% when the loan was issued in 2021, according to a report by S&P Global. 

The report added that there has been “minimal recent leasing activity,” and 11.8% of the building was available for sublease as of February. The building’s largest tenant, WSFS Financial Corp., has a December 2028 lease expiration and a termination option at the end of this month.

Next door, a similar situation is taking place. The $188M loan behind 1700 Market St. was transferred following Shorenstein’s imminent default and request to engage in loan modification discussions. The loan matured on Feb. 9, and those settlement discussions are ongoing, according to a May 15 update on Morningstar.

Shorenstein acquired the 850K SF office, which sits just two blocks from City Hall and Rittenhouse Square, for $195M in 2016, roughly eight months after buying 1818 Market St. It then spent another $16.7M between 2017 and 2019 on renovations, according to a Morningstar report. 

The building’s occupancy has nose-dived from 94% in 2020 to 77% in September of last year. The five largest tenants, comprising 43% of the net rentable area, have leases expiring in the next few years, according to an S&P Global disclosure.

Tierney Communications’ lease will expire in 2029, but it has a termination option in September 2025 with a $1.8M termination fee. The building’s largest tenant, Reliance Standard Life Insurance Co., similarly has a 2031 lease expiration date but a termination option in 2030, with a $2M termination fee. 

The Philadelphia properties have been victims of a submarket plagued by tenant evacuations. As of January, four- and five-star office properties in Market Street West have a 17.6% vacancy rate and a 21.8% availability rate, which is only expected to rise further, according to S&P Global.

Last year, Nightingale Properties, while it was embroiled in an embezzlement scandal, lost its largest investment in Philadelphia to foreclosure. The 2.2M SF office complex at 1500 Market is just a few blocks away from Shorenstein’s two struggling offices.

Shorenstein is facing its own potential foreclosure in New York City. 

In the Garment District, special servicer Mount Street has filed a foreclosure action against 1407 Broadway after Shorenstein defaulted on a $350M loan. The loan’s maturity date was extended twice before. 

Still, according to commentary on Morningstar, there could be hope for Shorenstein. Negotiations are continuing in parallel with the foreclosure action. Those discussions raised concerns with ratings agency Fitch Ratings, which warned that Mount Street wasn't being transparent enough with the building's financials.

Shorenstein bought the 1.1M SF office building as part of the firm’s Fund Eleven portfolio, spending $330M on the leasehold and another $62M to upgrade it. In 2019, the company secured the $350M loan with Barclays, which valued the building at $510M.

An array of notable tenants has occupied the building, including Comcast, Knotel and Uber, and its occupancy has dropped from 94% in 2019 to 82% at the end of June 2023, according to the Morningstar database.

In recent months, Shorenstein has begun offloading other office properties.

In March, the firm sold a 248K SF office building in Austin’s Mueller district, according to REBusiness Online. In April, it began marketing its majority stake in Charlotte's Camp North End redevelopment, a recently built — but only 58% occupied — 380K SF site with five adaptive reuse office buildings, the Charlotte Business Journal reported.